Stock Market Ends Sharply Lower as Worries About Economy Surface

As stock prices started tumbling in the first trading days of the year, many Wall Street professionals were tempted to describe the declines as the sort of adjustment that the market has gone through in recent years before moving higher.

But that optimism evaporated this week as the selling intensified. Concerns are now growing that the markets are signaling that the United States economy, despite its recent bright spots, is on the verge of a slowdown.

The fear is that economic problems in China have set off negative reactions around the world that could ultimately weigh on American households and corporations.

On Friday, stocks in the United States touched their lowest levels since late August. The Standard & Poor’s 500-stock index, the main benchmark for the United States market, is now down 8 percent for 2016 and nearly 12 percent below its benchmark high reached last year.

In the face of the market turmoil, investors are showing signs that they are again seeking out safe-haven investments like government bonds. The yield on the 10-year Treasury note, which falls as its price rises, declined to 2.05 percent from 2.09 percent on Thursday, after earlier falling below 2 percent for the first time since October.

“Technically we are in a bear market,” said Laurence D. Fink, the chief executive of BlackRock, the world’s largest money management company.

“There is just a broad reassessment of risk right now.”

A bear market occurs when stocks are down more than 20 percent from a high. The Russell 2,000, a measure of small-cap stocks, is actually down 23 percent from its peak. It fell 1.75 percent on Friday.

The debate now is whether the steep drops in the markets are an indication that the United States economy is falling into a trough that the country’s economic policy makers have not anticipated. The Federal Reserve increased interest rates in December, a move that showed that the Fed was on balance optimistic about the outlook for the United States economy.

On the one hand, it is important not to read too much into market moves. Markets often misinterpret what is really going on in the economy. The stock market came roaring back from sharp declines in 2011 and, more recently, from a rout last summer.

Also, since the financial crisis of 2008, the United States economy has displayed the ability to power through rough patches in financial markets.

Photo

The end of a long trading day, and week, on Friday at the New York Stock Exchange.Credit
Justin Lane/European Pressphoto Agency

Analysts note that the world’s central banks can always increase their stimulus policies if the economies they watch over start to sag again.

The global sell-off in stocks started in China, where the main Shanghai index dropped 3.6 percent on Friday. The index has fallen more than 20 percent from its December high. Stocks in London ended down 1.93 percent. Stocks in Frankfurt closed down 2.54 percent.

Investors were quick to sell companies that appear most vulnerable to a drop in global growth.

Shares of Intel, the giant chip maker, for instance, plummeted over 9 percent on Friday. When reporting earnings Thursday afternoon, Stacy J. Smith, Intel’s chief financial officer, made comments about future sales that unsettled investors. “This outlook represents a soft start to the year as we remain cautious on the level of economic growth, particularly in China,” Mr. Smith said.

Investors also shunned shares of companies that had soared in 2015. Netflix, which fell 2.8 percent on Friday, is now down 20 percent from its high in 2015.

The turbulence in the markets is causing pessimism over the economy to grow. And economists say they are taking seriously some of the signals they see in markets. Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, asserted that the markets that, in effect, predict interest rates and inflation appear to be doing a better job than, say, officials at the Fed.

Such markets have in recent months been more pessimistic, predicting lower interest rates and inflation, both of which can act as an early warning of lower economic growth ahead.

You are already subscribed to this email.

A month ago, investors in an interest rates futures market were predicting a nearly 90 percent chance that the Fed would increase interest rates in April, according to Bloomberg. Now that market is predicting only a 32 percent chance.

The United States economy is expected to grow 2.5 percent this year, according to a poll by Reuters of over 90 economists. A year ago, they were forecasting growth of 2.8 percent.

One school of pessimists asserts that the central banks’ policies used to stimulate slowing economies since the crisis are losing effectiveness. Such policies stoked huge increases in debt that borrowers will now struggle to pay back, causing broader stress on large economies. This threat seems particularly large in China, which unleashed a credit binge after 2008, but the defaults in the United States energy industry are also a sign of how debt-fueled growth can backfire.

A less gloomy camp contends that markets are just getting used to a world that is going to grow more slowly than in the past. Stock markets may struggle for a time, they say, but they are not going to crash and they are not signaling a severe global recession.

The Dow Minute by Minute

Position of the Dow Jones industrial average at 1-minute intervals on Friday.

16,400

Previous close

16,379.05

16,200

16,000

15,800

10 a.m.

Noon

2 p.m.

4 p.m.

Source: Reuters

JAN. 15, 2016

By The New York Times

A lukewarm economic outlook could be heard in the comments from the executives of United States banks that are reporting their fourth-quarter earnings.

Wells Fargo, which derives the vast majority of its business from the United States, said on Friday that while there were hopeful signs in the domestic housing and auto markets, economic activity was by no means roaring.

“There are pockets of strength,” John Stumpf, the Wells Fargo chief executive, in a call with analysts. “I am not going to say it is robust.”

But the global turbulence may feed more directly into the United States financial system — through country’s largest banks. Citigroup, for instance, has $20.5 billion of loans, mortgages, credit cards and other assets in China, the bank’s executives detailed on Friday. The bank also said that it was carefully monitoring its credit lines to businesses and consumers in Russia and Brazil.

Shares of Citigroup were down far more than those of other large United States banks on Friday, falling more than 6 percent.

Investors are now on tenterhooks as they wait for data that might clarify the strength of the United States economy and the stance of central banks.

Philip J. Orlando, a senior portfolio manager at Federated Investors, a mutual fund company, said he was waiting for the government report on United States gross domestic product, to be released on Jan. 29, and any announcements or utterances from officials at the Fed, whose monetary policy committee will meet on Jan. 26 and Jan 27.

“The market is acting as if China is already in recession and is dragging the U.S. into recession and there is nothing we can do about it,” Mr. Orlando said, “and there is nothing you can do to refute it until there are more data points.”

Correction: January 19, 2016

An article on Saturday about the United States stock market’s recent decline referred incorrectly to the Russell 2,000. It is an index of companies with small market capitalizations; it is not a broad measure of the stock market.

A version of this article appears in print on January 16, 2016, on Page B1 of the New York edition with the headline: Concern Grows That Market Sell-Off Is an Early Warning of a U.S. Slowdown . Order Reprints|Today's Paper|Subscribe